US consumer data supports growth drive

Washington, March 30, 2013

US consumer spending rose in February and sentiment among Americans perked up this month, further signs of an acceleration in economic activity in the first quarter after a near stall late last year.

The data yesterday also showed a rebound in income growth, putting the economy in a better shape to deal with tighter fiscal policy, particularly $85 billion in across-the-board federal government spending cuts, known as the "sequester".

"The economy is in a good place now in terms of momentum and strength, and it will need it as the government spending cuts will take something off growth as the year progresses," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

Consumer spending increased 0.7 per cent last month after a 0.4pc rise in January, the Commerce Department said.

Though part of the increase in spending, which accounts for about 70pc of US economic activity, was because of higher petrol prices, Americans also bought long-lasting goods such as cars and spent more on services.

Fuel prices at the pump increased 35 cents a gallon last month.

After adjusting for inflation, spending was up 0.3pc after advancing by the same margin in January. As a result, economists said consumer spending in the first quarter was on track to record its fastest growth pace since 2010.

"It appears that consumer spending actually accelerated in the first quarter despite the tax increases implemented at the start of the year," said Daniel Silver, an economist at JPMorgan in New York.

Some economists bumped up their first-quarter economic growth estimates.

Barclays raised its gross domestic product forecast by 0.7 percentage point to 3.3pc. Macroeconomic Advisers lifted their estimate by three-tenths of a point to 3.5pc.

The economy grew at only a 0.4pc annual pace in the fourth quarter.

A separate report showed households this month shrugged off the deep government spending cuts, focusing instead on a steady labour market improvement, which is starting to boost wages.

The Thomson Reuters/University of Michigan's index of consumer sentiment rose to 78.6 from 77.6 in February.

"Consumers have discounted the administration's warning that economic catastrophe would follow the reductions in federal spending, and consumers have renewed their expectation that gains in employment will accelerate through the rest of 2013," said survey director Richard Curtin.

And they have reason to be optimistic. Income increased a healthy 1.1pc after tumbling 3.7pc in January.

Personal income had increased sharply in December as businesses rushed to pay dividends and bonuses before tax increases took effect this year. That also skewed income data for January.

A 2pc payroll tax cut expired on January 1 and tax rates for wealthy Americans also went up. The consumer spending and sentiment reports were the latest to show little sign the tighter fiscal policy has been a major drag on the economy.-Reuters